States likely to reap a Rs 200-bn windfall, courtesy rising oil prices

At a time when fuel prices are scaling new highs, official data from petroleum ministry show that for every one rupee increase in petrol and diesel prices, states earn an additional revenue of around Rs 30 billion on annualised basis.

The base price of petrol and diesel—that before the application of state value added tax (VAT)—has increased by approximately Rs 5 and Rs 7 per litre, respectively, since April to date, data from Indian Oil Corporation show. This price jump would translate into additional revenue of about Rs 200 billion in the current financial year, according to Business Standard analysis based on the ministry estimates.

State Bank of India economists put the estimate of windfall gain in the same territory. “This increase in petrol and diesel prices is likely to give states a windfall gain of around Rs 227 billion over and above the budget estimates for current fiscal,” Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI said in a report.

States’ revenues are a product of taxes applied on the base price of the unit of fuel and the overall consumption of the fuel. State officials that Business Standard spoke to said that the fall in consumption might cancel out the benefit of the rise in base price.

However, current evidence from Karnataka looks promising for states. Despite traditionally lean demand, the state’s revenue from Karnataka Sales Tax (KST) on petroleum products has remained stable in April – August 2018-19. In 2017-18, revenue in monsoon months was considerably lower than that in other months.

In this scenario, economists expect better petroleum revenues for states in 2018-19. In ICRA’s view, even if some states reduce VAT rates on petroleum products, the year on year growth of the aggregate taxes on such products would remain healthy in 2018-19, given the rise in the price of fuels and relatively inelastic consumption.

Following the recent rise in prices, Rajasthan cut taxes on both fuels, followed by Andhra Pradesh and West Bengal.

Consumers are shelling more a rupee every day since the beginning of the month on petrol and diesel due to two clear reasons: rise in global crude oil prices and the coincident depreciation of the rupee vis-à-vis the US dollar. Crude oil price (Indian basket) rose from $63 to $76.8 per barrel, while the rupee depreciated from Rs 65 to Rs 72.3 per from the beginning of the financial year to date.

The central government, which imposes a fixed excise duty irrespective of the landed price of fuels, has its petroleum sale revenues unchanged. But states, who impose a mix of ad valorem value-added tax (VAT) and a fixed cess over the base price, certainly see an increase in revenue as the base price rises.

Among the states, Telangana, Tamil Nadu and Assam would be the biggest beneficiaries of the rise in fuel prices, since their ad valorem component of state taxes is highest among all states.

For every rupee rise in base fuel price, Telangana earns 35 paise more on petrol and 27 paise more on diesel. Tamil Nadu earns 34 paise and 25 paise, while Assam earns 33 paise and 24 paise on every one rupee rise in petrol and diesel, respectively.

Though Maharashtra (excluding Mumbai) effectively taxes petrol and diesel the highest among all states, their ad valorem component at 25 per cent is lower than these states. It imposes an additional levy of Rs 9 per litre on petrol, which is a fixed tax per unit sold.

Oil prices rallied in the beginning of the current financial year till May, and subsided after that till August, due to which, the growth in state petroleum revenues was not substantial in the first quarter.

States earned Rs 480 billion on taxes from all petroleum products. In comparison, states earned Rs 1.84 trillion in 2017-18 (Rs 460 billion per quarter on average) and Rs 1.66 trillion in 2016-17 (Rs 415 billion per quarter).

State VAT gets applied on the base price which is the sum of the price charged by the oil marketing companies to petrol station dealers and the excise duty applied by the Centre. Central government levies a fixed excise duty of Rs 19.48 a litre on petrol and Rs 15.33 a litre on diesel as of Wednesday, since the last excise duty cut in October 2017.